IRS has posted an update to the 2014 Form 8938 (Statement of Specified Foreign Financial Assets) instructions. The update reflects the changes made in final Code Sec. 6038D regs that were issued in December, 2014, and includes changes to the rules for dual resident taxpayers, an exclusion from the reporting of certain types of accounts, and an explanation of the exemption from reporting of assets reported on a joint Form 5481 or a joint Form 8865.

Background on FATCA. The Hiring Incentives to Restore Employment Act of 2010 (the HIRE Act) added Chapter 4, specifically, Code Sec. 1471 through Code Sec. 1474. Referred to as the Foreign Account Tax Compliance Act (FATCA), Chapter 4 generally requires withholding agents to withhold tax on certain payments to a foreign financial institutions (FFI) unless it has entered into a FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts. The withholding rules are essentially a mechanism to enforce new reporting requirements. Chapter 4 also imposes withholding, documentation, and reporting requirements on withholding agents, with respect to certain payments made to certain non-financial foreign entities.

In cases in which foreign law would prevent an FFI from complying with the terms of an FFI agreement, IRS has collaborated with other governments to develop two alternative intergovernmental agreement (IGA) models that facilitate FATCA implementation. Reporting financial institutions under an applicable Model 1 IGA (reporting Model 1 FFIs) would satisfy their Chapter 4 requirements by reporting specified information about U.S. accounts to their government, followed by the automatic exchange of that information on a government-to-government basis with the U.S. Under a Model 2 IGA, reporting Model 2 FFIs would report specified information about U.S. accounts directly to IRS in a manner consistent with the final regs (as modified by the applicable Model 2 IGA), supplemented by a government-to-government exchange of information on request.

The final regs provide guidance relating to the requirement that individuals attach a statement to their income tax return to provide required information regarding specified foreign financial assets in which they have an interest. Among other things, the regs provide requirements for “specified individuals” that have an interest in “specified foreign financial assets,” if the value of those assets is more than the applicable reporting threshold.

The form for making the required statement is Form 8938 (Statement of Specified Foreign Financial Assets). Form 8938 must be attached to one of the following annual returns and filed by that return’s due date (including extensions):

Form 1040 (U.S. Individual Income Tax Return),

Form 1040-EZ (Income Tax Return for Single and Joint Filers With No Dependents),

Form 1040-NR (Nonresident Alien Income Tax Return), or

Form 1040NR-EZ (U.S. Income Tax Return for Certain Nonresident Aliens with No Dependents).

New regs result in changes to Form 8938 instructions. IRS issued Form 8938 and the instructions to that form at around the same time as the regs were issued, and those instructions didn’t reflect certain provisions in the regs. So, now, IRS has issued the following to update the instructions to fully reflect the regs.

The following Form 8938 reporting rules, as more fully set forth in the final Code Sec. 6038D regs, apply to a dual resident taxpayer (within the meaning of Reg. § 301.7701(b)-7(a)(1)) who determines his or her income tax liability for all or a portion of the tax year as if he or she were a nonresident alien as provided by Reg. § 301.7701(b)-7.

1. A specified individual, who computes his or her U.S. income tax liability as a nonresident alien on the last day of the tax year, is not required to report specified foreign financial assets on Form 8938 for the portion of the individual’s tax year covered by Form 1040NR or Form 1040NR-EZ, if the individual complies with the filing requirements of Reg. § 301.7701(b)-7. Those requirements include the requirement to timely file Form 1040NR or Form 1040NR-EZ and attach Form 8833 (Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)).

2. A specified individual, who computes his or her U.S. income tax liability as a resident alien on the last day of the tax year, is not required to report specified foreign financial assets on Form 8938 for the portion of the individual’s tax year reflected on the schedule to Form 1040 or Form 1040EZ that is required by Reg. § 1.6012-1(b)(2)(ii)(a), if the individual complies with all of the filing requirements of Reg. § 1.6012-1(b)(2)(ii)(a). These requirements include the requirement to timely file Form 1040 or Form 1040EZ and attach a properly completed Form 8833 to the schedule to such Form 1040 or Form 1040EZ.

…Accounts excluded from the definition of a financial account under an applicable Model 1 or Model 2 IGA. For tax years beginning on or before Dec. 12, 2014, if the jurisdiction in which a financial account is maintained has an IGA in effect, or is treated as having a Model 1 IGA or Model 2 IGA in effect, on or before the last day of the taxpayer’s taxable year, retirement and pension accounts, non-retirement savings accounts, and accounts satisfying conditions similar to those described in Reg. § 1.1471-5(b)(2)(i) that are excluded from the definition of financial account in such IGA, are not required to be reported on Form 8938.

For tax years beginning after Dec. 12, 2014, the final Code Sec. 6038D regs provide that, in addition to retirement and pension accounts and non-retirement savings accounts described in Reg. § 1.1471-5(b)(2)(i), any retirement and pension accounts, non-retirement savings accounts, and accounts satisfying conditions similar to those described in Reg. § 1.1471-5(b)(2)(i) that are excluded from the definition of financial account in an applicable Model 1 IGA or Model 2 IGA, must be reported by the taxpayer on Form 8938. Thus, such accounts are subject to uniform reporting rules and must be reported without regard to whether the account is maintained in a jurisdiction with an IGA.

..Exemption from filing when taxpayer filed a joint Form 5471 or join Form 8865. A specified person that is included as part of a joint Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) filing or a joint Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) filing and who notifies IRS as required, is considered to have filed a Form 5471 or Form 8865. Thus, such a taxpayer does not have to report any asset on Form 8938, provided that the taxpayer (i) reports the asset on such Form 5471 or Form 8865 that is timely filed with IRS for the same tax year and (ii) reports on Form 8938 the filing of the form on which the asset is reported.